Weak Q1 Results Are Not a Precursor of Bad Times Ahead

Economists were very optimistic about the first quarter as we entered 2017. Unfortunately we started this year as we have started the past years with two concerns, weak growth in GDP and a marked drop in consumer spending. However, economists are not running for the doors or jumping ship, there is actually some very good news behind many of the statistical anomalies that occurred in the first quarter.

Gross Domestic Product increased at a dismal 0.7% annual rate in Q1 after growing at 2.1% in the fourth quarter of 2016. While this was the weakest performance since Q1 of 2014, it is in line with what we have observed to start each of the past few years. The first quarter GDP number is beset by the government’s problem in calculating seasonality and other data and it usually recovers in the next three quarters.

In my view, this rather lackluster economic growth is not something that should be a concern to businesses because other indicators in the economy are very strong.

The unemployment rate reached a new low moving down from 4.5% to 4.4% in April and we added 211,000 jobs. This is the lowest unemployment has been since May 2007. The labor market is still very strong as we have seen jobless claims below the key threshold of 300,000 for 110 straight weeks.

American consumers apparently stayed home in Q1 as Consumer Spending only grew at a 0.3% annual rate in the first quarter, this was the slowest growth since 2009 after a very positive increase in the fourth quarter of 2016 of 3.5%. The Commerce Department blamed the contraction on a mild winter which held down the demand for heating oil in the Northeast and this impacted sales at utilities. The other issue that they raised was the significant delay in issuing income tax refunds do to fraud concerns nationally. There was also a change to the savings rate that increased nearly $40 billion dollars in the first quarter of 2017, an indication that consumer spending is likely to rebound in Q2.

The Commerce Department reported that retail sales dropped 0.2% in March after a 0.3% decline in February. We haven’t witnessed a decline like this in more than a year, last March retail sales increased 5.2%. The good news for readers of the Retail Observer was this comment in the March report, “sales at electronics and appliances stores recorded their biggest rise since June 2015.”

Retailers, especially those in the clothing business have been hurt by declining mall traffic and the impact that Amazon.com is having in the marketplace. We have seen record store closings in the first four months of 2017, with HH Gregg declaring bankruptcy and Sears continuing to shutter mall location.

Given some of the uncertainty, the bright spot last month was Consumer Confidence, as measured by the Conference Board. It came in at 120.3, the highest it has been nine years and when Americans are optimistic about their economic future, consumer spending and retail sales usually increase.

I know that some of these numbers are not comforting but the full year projections are still very positive. Both Citi Bank, the IMF and UBS are projecting GDP growth north of 2.4% this year with unemployment dropping to a seventeen year low of 4.1%. It is likely that Consumer Spending will actually grow 3.4% this year since household debt to GDP is the lowest it has been since 2008,

We also still have the President’s promise of three extraordinary items of stimulus for our economy, a trillion dollars in infrastructure spending, massive tax cuts and broad deregulation. They have to be passed by Congress but they do carry both great potential and possibly great harm. While government spending could power significant growth in the economy, it must be weighed against the looming crisis of the National Debt.